Sunday, November 29, 2015

Question and Answer Time! Down Payments

"How much down payment will I need?" I heard this question again yesterday.  I get it a lot.

The short answer is, it depends. Of course, if you're asking, then you probably prefer the long answer.

It depends on the type of property you're trying to buy, the value of the home, your credit scores, and the type of loan you want and for which you can qualify.  Are you buying an investment property?  A lender will probably require 20-30% down.  A primary residence you'll live in?  Typically you'll need 5 to 20% for a conventional loan.  In 2014, one in five borrowers paid less than 10% down for a conventional loan.  There are, however, some popular lower-down-payment, non-conventional alternatives.  A common alternative is a loan backed by the Federal Housing Administration (FHA), which requires only 3.5% down.  If you meet their eligibility requirements, a Veteran's Administration (VA) loan requires NO money down.  If you are purchasing a home in a rural area, and meet other US Department of Agriculture (USDA) requirements, USDA also offers a no-money-down loan.

Home buyers can also check out down payment assistance programs, such as that offered by the North Carolina Home Finance Agency.  If you qualify, you my be able to obtain an interest-free, potentially forgivable second mortgage up to 5% of the first mortgage loan amount.  Check out the NCHFA website at  (I highly recommend first-time home buyers also look at the NCHFA Mortgage Credit Certificate as another source of potential savings!)

Keep in mind that with most loans, if you want to avoid paying for Private Mortgage Insurance (PMI), you may need to pay 20% down. PMI protects the lender in case a borrower defaults.  Depending on credit scores and interest rates, the PMI typically runs $30-$70 per month for every $100,000.  On a conventional loan, this monthly PMI payment goes away when the loan-to-value (LTV) ratio hits 80%.  (In other words, if you bought a home worth $100,000, paid $10,000 down, and took out a loan for $90,000, the LTV ratio would be 90%.  When your loan principal has been paid down to $80,000, the LTV would be 80%.)   VA and FHA also have mortgage insurance payments for their loans, but these payments last for the life of the loan; they never go away.

Bottom line:  As soon as you become interested in buying a home, your first step should be to sit down with a mortgage broker.  (Let me know if you need a recommendation.  I know some good ones!)  A good mortgage broker will help you understand what your best options are, and what you need to know before you even start looking for your dream home -- like how much you can realistically afford and what to save for a down payment.

The Cost of Paying PMI vs the Cost of Waiting to Buy